Wholesaler UNFI beset by earnings miss, balky acquisition

By Hank Schultz

- Last updated on GMT

Photo: UNFI
Photo: UNFI
Stock traders pummeled supplement and natural foods wholesaler UNFI after the company missed earnings projections and admitted a harder-than-expected integration of a recent acquisition.

UNFI, which has a dominant position in the distribution of natural products and a host of dietary supplements to the health food store channel, completed its acquisition of rival Supervalu in late October.

The value of the deal was pegged at $2.9 billion. The combined company distributes more than 110,000 products to over 40,000 customer locations — including natural product superstores, independent retailers, supermarket chains, e-commerce retailers and foodservice providers in the United States and Canada.

“We are facing several near-term headwinds, which include first, the macroeconomic environment of retail continues to be challenging, more and more retailers competing for their share of the consumers’ dollar. Products are now available in more and more outlets, including online,”​ said CEO and chairman Steve Spinner.

Spinner made his comments in an earnings call with analysts. The full transcript can be found on the site seekinglapha.com​.

Bottleneck in contract manufacturing

Spinner also said that the company had been experiencing a higher than expected number of out of stock items. Many of the brands it deals with work through co-packers, and he said demand for those services in the natural channel has been ramping up faster than the co-packers’ ability to rapidly add new lines.

In addition, Spinner said a number of the suppliers it deals with have reduced their promotional spending.

“There’s no price elasticity at retail. In other words, the retailers are saying to the big manufacturers, don’t you dare pass through any price increases because we can’t pass it through, which means we have to eat it. And that’s the biggest primary driver of the reduction in promotional spend because if the manufacturers can’t pass through the price increases, then they’re just going to reduce the promo spend to make sure that they remain whole,”​ he said.

Supervalu was also in the throes of rationalizing its distribution system at the time of the acquisition, Spinner said, which contributed to the division’s ‘disappointing’ near term results. But over time, the acquisition will work in the combined company’s favor, he asserted, by further diversifying the kinds of brands and products it can deliver.

“We talk a lot about how scale drives today with retailers. Five years ago, you could argue that a retailer might buy from 10, 15, 20 different wholesalers, whether it be specific by product or just general distributors,"​ Spinner said.

"Today, the retailers want to buy as much as they possibly can from as few as they possibly can, because the economics of delivery are such that the more you can add into the delivery system, the lower the price. When you think about building out the store, which we’ve talked about for a long time, we now do multiple billions of dollars in conventional and organic produce. We now do multiple billions of dollars in conventional and better-for-you protein. So we have effectively fully built out the store, which enables us to go to a retailer across conventional or independent or natural and provide them with just about every single item they need to put in their store,” ​he added.

Earnings details

UNFI reported an overall positive trend in sales, which reached $2.87 billion for the quarter. Excluding the $224 million contribution from Supervalu, net sales were up 7.6% year-over-year.

But profits were less than what analysts had been expecting. Traders sent the stock price tumbling to $14.12 today, down from more than $19 late Thursday before the earnings were announced. UNFI’s stock price is off from an all-time high of more than $83 a share in early 2015.

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